Intellectual property valuation involves determining the value of intangible assets such as trademarks, patents, and copyrights. This is necessary for selling, tax, financing, bankruptcy, and accounting purposes. Fair market value is used, but all parties must have full knowledge of the asset for a realistic valuation.
Intellectual property valuation is placing a value on a firm’s intangible assets. Intellectual property includes creative elements owned by companies, such as trademarks, copyrights and computer software. Innovative corporate objects, such as patents, industrial designs and trade secrets are also considered intellectual property.
The need to evaluate the value of intellectual property can be due to a number of reasons. One of the main reasons is if the business or owner of the intellectual property wants to sell it to someone else. Another reason for valuing intellectual property is for tax purposes, when agencies like the Internal Revenue Service (IRS) want to know the value of the property.
The introduction of Statement of Financial Accounting Standard 142, Goodwill and other intangible assets is also changing the approach to the valuation of intellectual property for accounting purposes. With the introduction of this principle, intangible assets are instead recorded in the corporate balance sheet at cost. Previously, these assets were managed using a stated depreciation period. Additionally, the IRS also wants to know how the intellectual property owner determined the value in the first place.
Two other situations where an intellectual property valuation is required are for financing and bankruptcy purposes. Beyond external sources needing to know how much intangibles are worth, companies also have internal property valuation needs. For example, if one of the assets is bought or sold, an intellectual property valuation is required for the purchase or sale to be properly recorded in the company’s accounting records.
In general, intellectual property valuation deals with the fair market value of the asset. Fair market value (FMV) is the price that a willing seller and willing buyer exchange to transfer ownership of the asset. In other words, fair market value is the current value of the asset in a hypothetical situation. In addition, all parties involved in the transaction must know all the details about the intellectual property that is part of the intellectual property valuation for it to be as realistic as possible.
For example, if a company patents an invention that could save a company $1 million United States Dollars (USD), the valuation would be the amount of cost savings to the company. Realistically, however, a company won’t pay for a patent on an invention that matches the cost savings. In reality, this puts the value of the patent somewhere between $0 US Dollars (USD) and $1 million US Dollars (USD).
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